Structuring Payment Provisions: What Does Security of Payment Legislation Leave Us to Play With?

Using performance of the parties to determine statutory reference dates.

WHAT YOU NEED TO KNOW

• The Supreme Court of Queensland has confirmed that performance of the parties to a contract can be used to calculate reference dates, subject to the "no contracting out" provisions of security of payment legislation.
• This decision impacts on the drafting of payment clauses in construction contracts, particularly in Queensland and New South Wales.

WHAT YOU NEED TO DO

• To place effective pre-conditions on the contractor's right to claim payment, principals should:
  • ensure that satisfaction of the relevant requirements is expressed to be a pre-condition to the accrual of both contractual and statutory reference dates; and
  • avoid including any conditions that:
    • do not serve a practical purpose;
    • are inimical, or contrary, to the Act's purpose;
    • unjustifiably impede the making of a payment claim under the Act; or
    • make the statutory entitlement practically illusory.
• In making and managing payment claims, be aware of the limits imposed by the "no contracting out" provisions of relevant security of payment legislation.

The issue…

• In all construction contracts, there is a natural tension between: principals - who wish only to pay for work which has been duly and properly performed in accordance with the contract; and
• contractors – who wish to be promptly paid for work performed to cover expenditure incurred, and margin anticipated.

This natural tension is often played-out in the manner in which the payment provisions of construction contracts are drafted, within the framework of relevant state-based security of payment legislation. Many attempts to manage this issue have failed when tested before the courts.¹

One method that was often used but largely untested by the courts was to make the provision of documents such as a tax invoice a pre-condition to the due date for payment of a statutory payment claim. Due to the mandatory maximum payment periods in Queensland² and NSW³, the precondition to payment approach is no longer viable in those States.

An alternative, the pre-conditioning of "reference dates" for the making of payment claims, was recently examined in the Supreme Court of Queensland, where it was confirmed that "post formation conduct" of the parties to a contract can be used to calculate reference dates, subject to the "no contracting out" provisions of security of payment legislation.

Controlling reference dates by contract

A "reference date" is the date when a claimant becomes entitled to a progress payment under the security payment legislation. This is determined either by or in accordance with the terms of the contract or, in the absence of express provision, by the default provisions in the security of payment legislation.

In Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd & Anor [2014] QSC 293, Justice Applegarth considered the validity of a contractual term that provided:

• a "reference date" only arose 14 days after the delivery of a draft payment claim; and
• the draft payment claim must be delivered on a specified date each month.

Following an extensive review of the authorities, Applegarth J concluded that the case law fell into two broad categories:

• cases where a reference date has arisen, but the contract purported to defer or extinguish the reference date if certain conditions were not met; and
• cases where a reference date had not arisen because the contract placed conditions on the reference date arising.

The first of these approaches is ineffective to defer or extinguish the statutory rights that flow from the reference date arising. The second approach, however, may be effective, subject to the operation of section 99 of the Building and Construction Industry Payments Act 2004 (QLD) (the Act).

Applegarth J considered that the Act envisages the calculation of a reference date by applying a contractual formula to relevant facts that are capable of being ascertained. For example, his Honour suggested a contract "might provide that a claim for a progress payment be made 14 days after event X occurs".⁴

His Honour indicated that "event X" could include:

• the post-contract conduct of one of the parties (e.g. "every 60 days after the contractor commences the works"⁵); and
• an event that is not certain to occur (e.g. "a milestone that is reached when a certain length of pipe is laid"⁶).

In this context, his Honour saw no reason to distinguish between "a contractual milestone and an event which is similarly within the ability of a party to bring about, such as the submission of a certain document."⁷

Accordingly, Applegarth J concluded that the clause providing that the reference date arose 14 days after submission of a draft payment claim was clause that "provides for a reference date to be worked out".⁸

The key issue in the case was the limits imposed by section 99 of the Act on the conditions that may be placed on a reference date.

While noting that there is no "hard and fast rule about the validity of such conditions"⁹, Applegarth J said:

"The purpose of the Act and the role which s 99 plays in constraining the contractual freedom of parties to modify the entitlements which the Act confers means that the parties do not have an unconstrained freedom to contract about when a reference date will arise. The Act does not allow the contract to impose onerous conditions which make a reference date more of a theoretical possibility than an actuality."¹⁰

In determining whether a condition is contrary to the security payment legislation or purports to change the effect of the legislation, his Honour considered the focus of the enquiry should be on the content and practical consequences of the conditions, particularly whether the condition:

• facilitates or impedes the purpose of the Act;¹¹
• is "excessively onerous";¹²
• denies a party what they are otherwise statutorily entitled to;¹³
• has significant utility in terms of the scheme created by the Act.¹⁴

Ultimately, Justice Applegarth held that the requirement for the contractor to submit a draft payment claim, followed by a formal claim, unjustifiably impeded a reference date from arising. Although it was not particularly onerous, the condition provided no practical utility because there was no nexus between the draft payment claim and the actual payment claim (in terms of the period of work and actual work covered by each document). Given the absence of any nexus between the claims, his Honour found that to extinguish what would otherwise be a statutory entitlement to progress claim because of a practically unnecessary requirement, goes against the purpose of the Act.

What this means for you

The decision in Lean Field Developments v E & I Global Solutions makes clear that it is permissible to condition the accrual of reference dates by reference to the contractor's compliance with; specified requirements. However, the courts will seek to strike a balance between the parties' ability to tailor their agreement and the need to ensure contractors are not faced with an illusory and, practically non-existent, right to progress payments. To place effective pre-conditions on the contractor'sright to claim payment, principals should:

• ensure that satisfaction of the relevant requirements is expressed to be a pre-condition to the accrual of both contractual and statutory reference dates; and
• avoid including any conditions that:
  • do not serve a practical purpose;
  • are inimical, or contrary, to the Act's purpose;
  • unjustifiably impede the making of a payment claim under the Act; or
  • make the statutory entitlement practically illusory.¹⁵

Careful consideration needs to be given to these issues both in drafting the payment provisions and managing relationships between the parties.

Subject to the further issue described below, through careful drafting and consideration of the purpose and effect of the pre-conditions, it is possible to agree an appropriate payment regime that is consistent with both the security of payment legislation and the protection of the principal's legitimate business interests. Depending on the particular contract, examples that may satisfy this test include:

• requiring a statement that the contractor has made relevant payments relating to the work (to protect against liability under Workers Compensation, Payroll Tax and Industrial Relations legislation¹⁶);
• evidence that insurances and security required under the contract are in place; and
• evidence that the relevant works have been duly performed and certified under the contract.

Further issues for industry (tax invoices)

As an important related issue, there are practical limits on the types of pre-conditions that can be used to determine a reference date. For example, one area of common concern for industry participants is that security of payment legislation requires payments to be made without a contractor first issuing a valid tax invoice. While it is possible for some principals to manage this through the use of RCTIs¹⁷, this option is not available to everyone. In addition, requiring a contractor to provide a valid tax invoice in advance of a payment schedule (which may be different to the amount initially claimed) does little to improve the situation.

We have worked through a range of alternative solutions to this issue with our clients, however the required timing for payment and the provision of valid tax invoices remains an area where the interplay between security of payment legislation and GST law is creating significant difficulties for industry participants.

Authors: Simon Walsh, Adam Firth, Meredith Riley and Louise Ritchard.

_{Notes
¹ See for example State of Qld v T & M Buckley P/L [2012] QSC 265, John Holland Pty Ltd v Coastal Dredging & Construction Pty Ltd & Ors [2012] QCA 150 and BHW Solutions Pty Ltd v Altitude Constructions Pty Ltd [2012] QSC 214.
² See s67W of the Queensland Building and Construction Commission Act 1991 (Qld).
³ See ss11(1A) and (1B) of the Building and Construction Industry Security of Payment Act 1999 (NSW).
⁴ Lean Field Developments Pty Ltd v E & I Global Solutions (Aust) Pty Ltd & Anor [2014] QSC 293, 30 (Applegarth J).
⁵ Ibid. 6 Ibid, 31.
⁶ Ibid, 31.
⁷ Ibid, 31.
⁸ Ibid, 38.
⁹ Ibid, 72.
¹⁰ Ibid, 74.
¹¹ Ibid, 74, 75.
¹² Ibid, 76.
¹³ Ibid.
¹⁴ Ibid.
¹⁵ Ibid, 80.
¹⁶ See s175B Workers Compensation Act 1987 (NSW), Schedule 2 Part 5 Payroll Tax Act 2007 (NSW) and s127 Industrial Relations Act 1996 (NSW).
¹⁷ Recipient Created Tax Invoice.}